What are mutual funds all about? Find out here

Investing in mutual funds is much more hassle free than direct stock investments
Advertisements carrying the message 'Mutual Funds Sahi Hai' which roughly translates to -mutual funds are the right choice for you - can often be seen on television. While many may have seen the ad, for a number of people, mutual funds still continue to be nothing more than a jargon of the investment world.

For those who are still puzzled by what exactly they are about here's a starter kit addressing frequently asked questions (FAQs) about mutual funds:

What are Mutual Funds?

Mutual funds are exactly what the name suggests. It is a fund (collection) created by money put together mutually (together) by different investors. Thereafter, this pool of money is managed collectively to earn the highest possible returns. All of the money that is pooled together by the fund is managed collectively to earn the highest possible returns. This is done by a professional fund manager.

How are Mutual Funds different from direct stock investment?

Since mutual funds are a collection of stocks, so an investor cannot control any individual stock. Also, the stocks are managed by a professional manager, so an investor does not monitor the stocks on his/ her own. A demat account is not mandatory for investing in mutual funds which is the case for investing directly in stocks. Demat or dematerialisation is the process by which physical share certificates held by an investor are converted into an equivalent number of securities in electronic form and credited into the investor's demat account.

Is investing in mutual funds a better option?

When it comes to investments, no speculations can be absolute. Still, most experts believe that unless you understand the nuances of the market really well, it is a better option to invest in mutual funds.

For starters, you do not need to worry about handling your investments because as mentioned above, it is done by fund managers. However, there is more that vouch for mutual funds. Here are some pointers:

Less volatility: Mutual funds being a collection of stocks, is less likely to lose too much in a day's trade. Thus, it is a safer option.
Recommended By Colombia

Better return potential: In sync with being less volatile, over a long period of time mutual funds are more likely to give prudent returns. Investments in direct stocks might give you spontaneous returns, but those success stories are rare and loaded with risk factors.

Less monitoring required: In any case, you do not need to monitor your mutual funds as fund managers do that for you. On top of that, mutual funds being an assortment of stocks, you do not need to take care of the daily churning of any particular stock.